A federal judge in New York did something unusual today. He rejected a settlement in a fraud case involving a major bank. Citigroup was accused by the Securities and Exchange Commission of cheating customers who had invested in one of those complex mortgage-backed securities that were so popular a few years ago. The company agreed to pay $285 million to settle the case, but Judge Jed Rakoff refused to accept the deal and ordered the case to trial instead.

NPR's Jim Zarroli joins me now to explain. And, Jim, what exactly did the judge to rule on today?

JIM ZARROLI, BYLINE: Well, he basically said, you know, I'm supposed to decide whether this settlement is fair, whether it's in the public interest. I cannot do that because I don't really know what happened. The Securities and Exchange Commission accused Citigroup of fraud. But then, it did what it almost always does, it agreed to a settlement. And Citigroup agreed to pay a penalty.

But at the same time, it isn't admitting wrongdoing. It isn't admitting that it committed the fraud, which is the way these settlements are almost always drawn up. The judge said: Look, I don't know what happened here. We don't know the facts. There hasn't been a trial. And so, I can't make a ruling here. He said at a time when the financial market gyrations have depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth.

RAZ: Jim, remind us of some of the details of what Citigroup is accused of.

ZARROLI: Well, this is one of those kinds of weird, complicated cases that happened during the mortgage boom. Essentially, the SEC says Citigroup created one of those mortgage-backed securities sold to some of its customers. But, you know, what they didn't - the customers really didn't know is the product was kind of a dog. A lot of the mortgages underlying it were pretty dubious.

Not only didn't Citigroup tell investors this, but it was actually shorting some of the assets. In other words, it was betting that the security would fail even just as it was telling its customers it was a good investment. And the judge said, you know, this is a serious fraud if Citigroup really did is, then it's getting off really lightly. But the case isn't going to trial so we don't know for sure.

RAZ: Jim, if the SEC and Citigroup agreed to settle this, how could the judge reject it?

ZARROLI: Well, that is what the judge talks about in his ruling. He makes a comment, you know, the SEC doesn't really get anything out of this but a quick headline. In other words, they're trying to show that they're doing their job, they're pursuing the bad guy. But I think if you really want to know why the SEC goes along with deals like this, look at the statement they released today in response to the ruling.

Basically, the SEC said, you know, look, if we force companies like Citigroup to admit wrongdoing, you know they won't do it. We'll have to go to trial. It will take enormous time and resources. It won't be worth it. In this way, we at least get some money.

But the judge said, you know, there are a lot of problems with doing it this way. The fact that Citigroup won't admit wrongdoing means that the people who lost money in the deal - and the losses were, you know, $700 million - are going to have a much harder time suing to get their money back. If Citigroup had admitted wrongdoing, then would have to pay some of these investors.

RAZ: But if the federal government believe that the company committed fraud, why would it have let Citigroup off so easily?

ZARROLI: Well, I think it does this because, you know, it has limited resources. It has limited time. And it says that if it puts money into a long trial into a single case like this, it won't have money and time and resources to put into other cases.

RAZ: Jim, very briefly, what happens now?

ZARROLI: Well, Judge Rakoff ordered Citigroup to go to trial next July. You know, I think that both sides will try to come up with a settlement that's more amenable to the judge. Something very similar happened with Bank of America a couple of years ago. The judge was ultimately prevailed upon to change his mind. But he's clearly not happy he did that and it's not clear he's going to do so again.